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MenuSeed raise on angelist via convertible debt note?
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There's no downside to raising on a note other than that any fundraising is time-consuming. It is becoming standard practice to raise money from angels on notes with caps adjusting upwards based on key points of the business proving more viable.
The worst mistake I see many accelerator companies make is that they don't fundraise enough to really stand-out at Demo Day or whatever the conclusion event is for your accelerator. The reality of it is that there is significant accelerator fatigue and most cohorts from even top accelerators are failing to find much investor interest/enthusiasm upon graduation. Companies must really be striving to be the *most* exciting (by way of traction or evidence of viability) by the time they graduate, so raising additional money now makes a lot of sense.
No downside, as long as whatever money you raise gets you to the conclusion of an important business experiment. For example, if the $50k gets you to the point where you can demonstrate a growing revenue stream, then it's probably a good idea. If not, then you should evaluate what financing you need in order to prove traction in the market, then raise that much. Since you already have some paying customers, people will ask questions about the "quality" of that revenue. Will it recur? Is it representative of the customer base you intend to sell into? Are there enough of them and enough revenue in order to prove that your unit economics are good? Sorry that this answer has more questions in it, but that's how it goes.
There's no reason for you to avoid raising using a convertible note. There are plenty of investors who prefer priced rounds, but for the stage you're at, none of these folks will be involved in the deal.
However, you mention using AngelList. I'm not sure if you intend to try and source that 50k from AngelList -- if so, I'd recommend against that. For such an early part of the raise, you're far better off looking for people already in your network. AngelList's syndicate or Invest Online features are usually more successful for entrepreneurs that already have some fundraising traction and are looking to fill out their round.
If you're looking to find that first investor, there are some ways to use AngelList that could help:
1. You can apply to incubators using AngelList (a great choice, especially if you're not well networked to investors today)
2. You can create a better offline target list of investors by location, category, #/type of investments, etc.
3. You can follow investors, and hope they get intrigued (make sure to list your company and short pitch in your bio)
4. You can more easily identify which investors you may already be connected with via a friend
There are probably a handful of angels, like Sundeep Ahuja, who have published a way for Startups to get in touch
I find it easiest to think of AngelList as programmatic infrastructure for traditional investing decisions - it doesn't change the way investors make decisions, or the strategy you should take to raise financing (at least, it hasn't changed that yet).
Getting your first good investor or two is still much harder than filling folks in after them. The best way to find your first investor is still personal network or introductions.
Related Questions
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What is the average cost to close a round of seed funding?
I'm reluctant to say "it depends," but legal expense for a true seed round varies dramatically based on: 1. Whether the investment is structured as a priced equity round vs. convertible debt (or variations on that theme such as "SAFE") 2. Number and location of investors, timing of closing(s), and prior angel investing experience 3. Company counsel's efficiency and fluency in industry norms 4. "Deferred maintenance" necessary in areas like corporate formation, founders' equity issuance and IP assignments. #4 is the item that takes many entrepreneurs by surprise. On the investor side, it leads otherwise very savvy observers to give unrealistically low estimates of legal expense because they assume starting from a clean slate. This item is also most resistant to automation or standardization because startups come into being many different ways; each story is unique. I would put the lowest estimate at around $3K, assuming the company is already formed as a Delaware corporation with clean, basic documents, has issued founders' stock and handled related IP and other matters, and simply needs to issue a convertible note to one or two accredited investors with minimal negotiation of documents. The highest I would expect for a true "seed round" is about $15K, where some corporate cleanup is needed, the deal is structured as a streamlined kind of preferred equity (e.g., Series Seed), there are multiple closings with investors on different dates and terms, etc. Beyond that point we're really in "Series A" territory, doing things like creating a full set of VC preferred stock investment documents (about 100 pages), negotiating with investors' counsel (at the company's expense), and so forth. The expense and complexity of a traditional Series A deal have been the main impetus behind using convertible debt or Series Seed-type documents for seed-stage investments of less than $1 million or so in recent years. I hope this proves helpful. Always happy to chat and answer further questions.AJ
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Does anyone know of a good SaaS financial projection template for excel/apple numbers?
Here is a link to a basic model - http://monetizepros.com/tools/template-library/subscription-revenue-model-spreadsheet/ Depending on the purpose of the model you could get much much more elaborate or simpler. This base model will help you to understand size of the prize. But if you want to develop an end to end profitability model (Revenue, Gross Margin, Selling & General Administrative Costs, Taxes) I would suggest working with financial analyst. You biggest drivers (inputs) on a SaaS model will be CAC (Customer Acquisition Cost, Average Selling Price / Monthly Plan Cost, Customer Churn(How many people cancel their plans month to month), & Cost to serve If you can nail down them with solid backup data on your assumption that will make thing a lot simpler. Let me know if you need any help. I spent 7 years at a Fortune 100 company as a Sr. Financial Analyst.BD
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How important is a co-founder when it comes to raising capital?
I'm a single founder who was raised angel and venture capital. If your business is compelling enough, you could raise angel funding. But there is little chance you can raise venture funding without a team in-place. It's a negative signal to institutional investors that you haven't been able to lock down a committed team. That said, depending on the nature of your product and traction, it sounds like you might be past the stage of recruiting a cofounder and more into hiring a great team of employees. The differentiation being less title and more the amount of equity. It sounds like you are selling a physical product so the question is whether you have built the capacity to scale. If not, the importance of having someone on your team who has done that at scale, even at the angel level of funding, could be helpful if not required. Happy to do a quick call and give you more contextual advice.TW
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What happens to a convertible note if the company fails?
Convertible notes are by no means "earned." They are often easier to raise for early-stage companies who don't want to or can't raise an equity round. Equity rounds almost always require a simultaneous close of either the whole round or a defined "first close" representing a significant share of the raised amount. Where there are many participants in the round comprised mostly of small seed funds and/or angel investors, shepherding everyone to a closing date can be very difficult. If a company raises money on a note and the company fails, the investors are creditors, getting money back prior to any shareholder and any creditor that doesn't have security or statutory preference. In almost every case, convertible note holders in these situations would be lucky to get pennies back on the dollar. It would be highly unusual of / unheard of for a convertible note to come with personal guarantees. Happy to talk to you about the particulars of your situation and explain more to you based on what you're wanting to know.TW
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When raising money how much of equity do you give up to keep control? Is it more important to control the board or majority of shares?
It entirely depends on the kind of business you have. If you have a tech startup for example, there are pretty reliable assumptions about each round of funding. And a business plan and financial forecasts are almost totally irrelevant to sophisticated tech investors in the early stages of a company's life. Recent financial history is important if the company is already generating revenue and in that case, a twelve-month projection is also meaningful, but pre-revenue, financial forecasts in tech startups mean nothing. You shouldn't give up more than 10-15% for your first $100,000 and from that point forward, you should budget between 10-20% dilution per each round of subsequent dilution. In a tech startup, you should be more nervous about dilution than control. The reality of it is that until at least a meaningful amount of traction is reached, no one is likely to care about taking control of the venture. If the founding team screws-up, it's likely that there will be very little energy from anyone else in trying to take-over and fix those problems. Kevin is correct in that the board is elected by shareholders but, a board exerts a lot of influence on a company as time goes-on. So board seats shouldn't be given lightly. A single bad or ineffective board member can wreak havoc on a company, especially in the early stages of a company's life. In companies outside of tech, you're likely going to be dealing with valuations that are far lower, thus likely to be impacted with greater dilution and also potentially far more restrictive and onerous investment terms. If your company is a tech company, I'm happy to talk to you about the financing process. I am a startup entrepreneur who has recently raised angel and VC capital and was also formerly a VC as part of a $500,000,000 investment fund investing in every stage of tech and education companies.TW
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